File photo In an interview with Shilpy Sinha, Keki Mistry, vice chairman of HDFC, talks about the opportunities in the affordable housing segment, synergies from the Gruh-Bandhan merger, and the way ahead for India’s mortgage-lending pioneer.

Edited excerpts:

Both Gruh and Bandhan didn’t react positively to the merger in the market…You cannot look at the price of shares right after the merger. They can go in any direction. You have to look premerger at the shares, before it came to the press. So, if you look at the price in the last six months… two percent average growth over six months equates to a lot.

What was the rationale behind the merger?We were looking at various options on what to do in the long term, say 15-20 years. One option was to combine into HDFC, the other option was to combine into another entity. We found that the synergy of combining Gruh into HDFC was lesser because HDFC is doing housing finance, and was already offering technical systems, legal systems, credit systems... everything that Gruh is.

Secondly, Gruh’s operation is largely in Western India and HDFC has a large presence in Western India, so cost synergy would not have come. Also, HDFC’s balance sheet is very large, about ₹3.7 lakh crore... so it wouldn’t have created that much of an impact from the perspective of balance sheet growth for HDFC.

HDFC disburses something like 20 times what Gruh does in a month. In that sense, it wouldn’t have made material difference to HDFC.With Bandhan, the synergy of a merger is more (pronounced). The synergy comes from the fact that Bandhan is not into housing finance and would bring a completely new set of business perspectives.

There is a huge focus from the government, the prime minister, on housing finance. Bandhan will have access to Gruh’s operating systems. This will create a very large rural and semi-urban lending pool. Gruh’s average loan size is ₹8-8.4 lakh, so it typically caters to the kind of customers that Bandhan would cater to than an HDFC would.

Third, Bandhan will benefit from the fact that Gruh’s operating system is time-tested, strong and survived successfully (through the) years and it will have access to western market.

The branches of Gruh - a lot of them are in Western India that Bandhan doesn’t have. Gruh will benefit from the fact that Bandhan has an all-India presence. Also, as a bank, they will have access to low-cost accounts and deposits.

The price to book is very different for both companies…

The price to book for Bandhan is closer to Gruh than HDFC. Gruh is trading at a much higher margin.

One of the reasons for the merger was to avoid an overlap with subsidiaries. Will HDFC now increase its focus on affordable housing?Our average loan for the lower income section is ₹17.6 lakh and economically weaker section is ₹10 lakh. Whereas the average loan size for Gruh is ₹8 to 8.5 lakh.

The segments are slightly different but we are providing loans to economically weaker sections just like Gruh is. So apart from the synergies, the merger (with HDFC) would have brought in a little bit of conflict… If you look at Bandhan, there is a larger lending platform and wider geographical reach that shareholders of Gruh will have.

How competitive is affordable housing, given the number of housing finance companies? How is the portfolio performing?I don’t want to talk about numbers but the affordable housing space is very large. Housing per se in India has phenomenal opportunity for growth because of low penetration, improved affordability, and government benefits.

Most importantly, the demographics that two-thirds of the population of India are below 35 years… and unlike the West, people don’t buy houses here in their 20s.

The average age for buying a house here is 38-39, and the majority of Indians are yet to reach that age, presenting a huge market potential. Over the next 10, 15, or 20 years, there will be structural increase in demand for affordable housing.

You recently raised funds through the ECB route from Japan. Are there plans of diversifying fund sources further?We have extremely diversified sources. We borrow through masala bonds, ECBs, Japan bank funding, public deposits, etc.

When you raised ₹13,000 crore a year back, you had talked about entering other businesses...We are looking at opportunities like health insurance.